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Who Owns the Investment Decision?

You (as the adviser) own the decision for having selected the specific investment solution utilized by your client.  As a consequence, you also own the blame.  Does it really have to be this way and why does it work in this fashion for almost all of the adviser/client relationships?




Let me clarify that I am not talking about where on the efficient frontier your client’s portfolio should be located, i.e., what tradeoff has been selected between expected return and expected risk.  Recognize that an infinite number of solutions exist for any given point on that efficient frontier  –  but yet one specific solution is selected for your client.  Unfortunately, when you instruct your client as to the particular investment solution that will be implemented (the specific recipe for that unique spot on the efficient frontier), when you make the decision for him/her, your client is effectively excluded from the decision and as a consequence:


  • Has little commitment to following your particular formulation,
  • Has little (if any) understanding as to the implementation’s pros and cons,
  • Won’t know how to interpret the inevitable favorable and unfavorable outcomes that come along  –  leading to misunderstandings and disenchantment,
  • Will frequently second-guess the investment journey with the passage of time, continually questioning your judgment and expertise,
  • Won’t understand how, when, or why to make appropriate adjustments to their particular implementation as their circumstances change, as “life happens,” and
  • Holds you accountable for any disappointment or misunderstanding.

How did we as an industry get ourselves into this predicament?  Almost exclusively, investment management organizations are product manufactures, advertisers, and distributors.  In essence, an industry has been built on the basis of a product-sale instead of a consultative service serving a long-term dynamic need.  Unfortunately, in this regard, the investment industry is worse than most other industries.  Consider health care, it suffers from a similar problem but to a far lesser extent.  The large health care providers are focused to a degree on creating, manufacturing, selling, and distributing a product  –  such as the cholesterol drug Lipitor.  This is in contrast to the greater or real need of delivering a life-long dynamic process designed to optimize a person’s health.  Fortunately, individual doctors came together to form a profession and acting in the capacity of professionals, have collectively encouraged the aggregate health care industry to focus at least in part on the life-long health of an individual instead of just another treatment-and-transaction.


Given the investment industry’s focus on product manufacture and sale, almost all advisers have followed the industry’s lead and have fallen into the trap of becoming, in part, product salesmen.  If you present your client with a single investment recipe for the implementation of their spot on the efficient frontier, then you are forced into the unenviable position of having to justify your decision to your client  –  of having to SELL your idea to your client as the best or right solution for who they are.By offering a single solution, you have become a salesman.  Perhaps you are hesitant to agree because you have searched all possible solutions and feel that you have identified the single best.  Maybe you have adopted the DFA belief structure and as a consequence only offer your clients DFA-based positions on the efficient frontier, claiming that you have discovered the rare and exceptional truth that applies to all clients no matter their own quite variedpersonalities and heterogeneous beliefs.  In this case, you are still stuck with the task of selling the DFA solution to your clients and owning the decision through the inevitable disappointments, surprises, and misunderstandings that unfold with the passage of time.  This would be analogous to the surgeon who always offers a single treatment no matter the uniqueness of his varied patients  –  acting as the all-knowing, all-seeing Oz.




So how does one exit from this trap?  Stop offering a single investment solution that forces you into the position of product salesman.  Instead change your role to that of the surgeon who offers their patient several alternate treatments, each designed to meet their current health care needs, but with remarkably different pros and cons, i.e., each with surprisingly different health care journeys.  Become a consultative educator and coach for your client, helping them to understand the various alternate treatments and how they differ with respect to pros, cons, and journey.  Engage your client to explore their own preferences and biases so that they, and not you, can select the single treatment that best matches their preferences and beliefs as opposed to yours.  Now your client owns the decision and not you.  Yes, you still own the education, consultation, and above all, the responsibility for offering highly differentiated and genuinely honest alternate treatments (no witch-doctoring such as market-timing, aka “tactical asset allocation”).  But frankly, that is a far firmer foundation to stand on than falling into the trap of being a product salesman.  Is it more work?  Yes, but if done correctly, your clients will perceive far greater value and deepen their trust.  As a consequence, your retention and referral rates will climb.


Are there highly differentiated and genuinely honest alternate investment solutions each representing a single spot on the efficient frontier?  As the consultative educator and coach, your task is to identify such and present them to your client for their selection.  They do exist, but our industry doesn’t make it easy.  Unfortunately, being the product-centric industry that it is, investment organizations in large measure deliver product that over-promises and under-delivers.  It doesn’t have to be this way, but being product sellers, they can’t help themselves.  Earlier this month, I met with one of the largest investment management companies here in the US as they were seeking my input regarding a new quantitative investment strategy that they are rolling out.  It was going to be billed as a highly tax efficient solution using active tax management techniques.  But it also was to be advertised as very low cost, offer unusuallytight tracking to its performance benchmark, provide attractive multi-asset class diversification, and be structured as a separate account.  –  once again, a classic case of over-promising and under-delivering.  Any one of these objectives is reliably achievable.  But by promising all, they are quite likely to deliver none.




If we restrict ourselves to a single highly differentiated objective, we can offer our clients clear and honest choice.  As a hypothetical example, consider a simple 60/40 stock/bond mix positioned on the efficient frontier.  If this is the need (or illness to be treated carrying my health care analogy forward), then alternate forms of treatment could be:


  • Ultra low cost  (all in, internal and external fees and expenses combined),
  • Ultra low taxes  (using highly active tax management techniques),
  • Ultra high diversification  (no restrictions or limitations on geography, asset category, or vehicle structure),
  • Serious active security selection  (not pretending that a mutual fund with 125 securities in it could possibly ever offer successful security selection), and
  • Thoughtful active opportunistic asset allocation  (no market timing, instead wait for the fat pitches to come along).

Observe how each of these five alternative treatments are exclusive paths  –  if you go down one path then you can’t go down another, they are in conflict.  A tradeoff must be made, as in life.  If you want low taxes, then you must pay more.  If you want serious, genuine active security selection, you must give up meaningful active tax management.  One necessary input to success is limiting one’s focus to a single objective and then putting all energies into achieving that objective.  No more over-promising and under-delivering.




For the adviser that successfully completes this transition from product salesman to consultative educator and coach, the reward is well worth the continuing effort.  Successfully offering honest, highly differentiated alternatives and helping your client understand their own preferences and beliefs, will cause your client to:


  • Feel involved and in control and as a result has a serious commitment to following the game plan as designed,
  • Have a well-developed understanding of the pros and cons of the decisions and prioritizations,
  • Have a clear appreciation for how to properly understand future results, correctly interpreting the inevitable favorable and unfavorable outcomes along the way,
  • Rarely second-guess the journey, since he/she determined the journey with clear understanding and selected what to emphasize and deemphasize,
  • Better understand what adjustments to make and what to look out for as “life happens” or his/her circumstances change.


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